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TMI Blog2016 (12) TMI 1140X X X X Extracts X X X X X X X X Extracts X X X X ..... ate evidence in the regular course. The allowance by the ld. CIT(A) is on the ground of trial production, a claim we find as without basis in-as-much as there is nothing to show that the Windmill worked or even any electricity generated, by 31.3.2010. How could there be, one may ask, trial production without any production? The question of it being concluded successfully, removing all operational glitches, etc., as is required to be, is farfetched - Decided against assessee Short-term capital gain (STCG) on the sale of the old Windmill - Held that:- We have already adjudicated on the eligibility of the new Windmill, purchased on 31.3.2010, for depreciation, deciding against it in view of its’ non-user (refer paras 3 all the expenditure incurred to bring the capital asset to the condition and location of its intended use forming part of, and is to be accordingly capitalized at its cost. We decide accordingly, and the assessee succeeds. Foreign travel expenditure of wife of partner in the assessee- firm - Held that:- We find some merit in the argument, which was also advanced before the ld. CIT(A). The product sold, i.e., footwear, is an item of common, daily wear/use, and of which i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ands allowed in appeal on the basis that the trial run/production would also be construed as having put the machinery to use for the purpose of business. 3. We have heard the parties, and perused the material on record. Discussion 3.1 The question before us is if the assessee is eligible for it's claim of depreciation allowance on the new Windmill acquired by it. Section 32(1), which provides for depreciation allowance under the Act, reads as under: 'Depreciation. 32. (1) In respect of depreciation of- (i) buildings, machinery, plant or furniture, being tangible assets; (ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998, owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed- (i) in the case of assets of an undertaking engaged in generation or generation and distribution of power, such percentage on the actual cost thereof to the assessee as may be prescribed; (ii) (ii) in the case of any block of assets, such percentage on the written ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me. In CIT vs. G. N. Agrawal [1996] 217 ITR 250 (Bom), again, the trucks under repair during the relevant year were already part of the assessee's business (operational) assets, having been put to use earlier, as also in the subsequent year. Their being thus under repair during the relevant year was considered by the Hon'ble Court as of no moment. Surely, the capital assets already deployed in, and committed to the business could not be regarded as not in use merely on account of the suspension from active user on account of withdrawal from service for repairs, which is only to ensure the continuity of their service. It was under such like circumstances, signifying passive user, as against an active one, that the Hon'ble Court found the same as satisfying the test of 'user' and, thus, liable to be regarded as 'used' in terms of section 32(1). Can, for example, a plant or machinery, which could not be used for want of (say) feedstock or energy, be regarded as 'used', so as to be eligible for depreciation. The answer, to our mind, would depend on whether the same is functional as also if it stands put to use earlier. Surely, where so, temporary non-user will not disqualify the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s equivalent to the word "established", but operations for establishment cannot be equated with the establishment of the unit itself or its setting up. The applicability of the proviso has, therefore, to be decided by finding out when the company commenced operations for establishment of the unit, which operations must be antecedent to the actual date on which the unit is held to have been set up for purposes of the principal clause.' The Hon'ble Court, in so deciding, referred to and applied the principle laid down in Western India Vegetables Products Ltd. vs. CIT [1954] 26 ITR 151 (Bom), thereby approving it. The question was finally answered by it in the negative in-asmuch as the manufacture of absorbent cotton wool, for which the unit was being set up, could not take place or be produced. Similarly, in CIT vs. Industrial Solvents and Chemicals Pvt. Ltd. [1979] 119 ITR 608 (Bom), the business of the assessee-company was held to be set up only on the receipt of the power connection and not earlier on the purchase of raw material or even the installation of the machinery subsequently. A business is thus set up or established only when it is ready to be commenced, all an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the business, plant and machinery could be said to be ready to use for the manufacture of industrial solvents and ether. The Hon'ble Court, after examining the facts of the case found that the installation of the machinery (which was completed by end of December, 1960 or January, 1961) was not sufficient, and that it could be said to be ready for production and the business, accordingly, ready to be commenced and the business therefore setup only by 19.8.1961 and not earlier on February 1961 whereat the finished product produced was not marketable. The claim of depreciation and development rebate was accordingly held to be admissible only with reference to the said, later date. To similar effect is the decision in the case of CIT vs. L & T. Mcneil Ltd. [1993] 202 ITR 662 (Bom). To capsule, it is only on a successful completion of the trial run and, thus, commissioning of the plant, that the business is to be regarded as set-up. How could a plant or machinery be regarded as used for the purpose of business when the same (business) is itself not set-up? Section 28 only contemplates income of a business or profession carried on by the assessee at any time during the year. Only, ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly temporary and is valid upto 29.4.2010. This authorisation is issued for conducting trial run of the equipment and commissioning of the WindMill. You should submit the Compliance report for the defects pointed out during the inspection and communicated to you separately on or before that date and get it regularised under Rule 47 'A' and Rule 63(2) of Indian Electricity Rules, 1956. Under Rules 30(3), 46(3) and 65(7) of Indian Electricity Rules, 1956, you are at all times solely responsible for the maintenance of the above installation in such condition as to be free from danger.' The sector being highly regulated, the purpose of the authorization is for trial run and commissioning. It is to be followed by a compliance report, which only implies, as apparent from its reading, removing the defects pointed out, of which reference is to be made therein. No compliance report is on record or produced by the assessee at any stage. It is only thereupon that the machine could be regarded as commissioned. The commission certificate dated 31/3/2010, again, only conveys that the Windmill has been connected to the ATTRANSCO grid and under trial run, i.e., till the company declares the comme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , it is clear, would require approval from the concerned Electricity Board/Regulatory Authority in-as-much as electricity is to be, through connection with the grid, delivered for commercial consumption. Conclusion 4. In our clear view, therefore, the assessee's claim for depreciation is without basis, both on facts and in law. We have, after visiting the law, explained by the Hon'ble Apex Court and the Hon'ble jurisdictional High Court, based on factual findings and on the basis of material on record, found the assessee's case, resting on claim of trial production, as completely unfounded, even exhorting the assessee qua any further material to evidence it's claim of trial production, which is facile in the absence of any material on record, nay, even generation of any electricity, a fact emphasized by the Assessing Officer (AO) and confirmed by us during hearing. Rather, the trial production should lead to the removal of operational glitches or defects, even as explained by the assessee itself per its submissions before the Revenue authorities - finding reproduction in their orders, leading to regularizing its authorization, and of which the assessee ought to have adequate evi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsequent event. 6. We have heard the parties, and perused the material on record. We are principally in agreement with the first appellate authority that it is the status of the block, positive or negative - STCG resulting in the latter case, as at the end of the year, which is to be seen in-as-much as the depreciation is to be computed only at the year-end, and on the value of the block thereat (refer s. 43(6)). This in fact is plain from the bare language of s.50, reproduced as under, whereunder the 'surplus' arising on the transfer of a depreciable asset forming part of a block of assets is deemed as a capital gain arising on the transfer of a short term capital asset, i.e., STCG, by definition, also prescribing the manner of its computation: 'Special provision for computation of capital gains in case of depreciable assets. 50. Notwithstanding anything contained in clause (42A) of section 2, where the capital asset is an asset forming part of a block of assets in respect of which depreciation has been allowed under this Act or under the Indian Income-tax Act, 1922 (11 of 1922), the provisions of sections 48 and 49 shall be subject to the following modifications :- (1) wher ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny block of assets shall be calculated at the percentages specified in the second column of the Table in Appendix I to these rules on the written down value of such block of assets as are used for the purposes of the business or profession of the assessee at any time during the previous year.' The fore-going is the only harmonious interpretation on a conjoint reading of the different provisions noted above. Not so reading the same would tantamount to allowing depreciation, which is to be allowed on satisfaction of the precedent condition of the user, on the assets acquired during the year independent of their user, defeating thereby s. 32(1), as explained, with reference to the decisions by the Hon'ble jurisdictional High Court, per the preceding part of this order. It would be incongruent and internally inconsistent to state that while an asset qualifies to form part of a block of assets, depreciation thereon is not exigible on account of its non-user. We have already adjudicated on the eligibility of the new Windmill, purchased on 31.3.2010, for depreciation, deciding against it in view of its' non-user (refer paras 3 & 4 of this order). The same would, therefore, not enter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bunal, as in the case of CIT (Dy.) vs. Sanjiv Gupta [2011] 135 TTJ 641 (Luck). 8. We have heard the parties, and perused the material on record. As explained in CIT vs. R. D. Aggarwal & Co. [1965] 56 ITR 20 (SC), which stands referred to in CIT vs. Toshoku Ltd. [1980] 125 ITR 525 (SC), and continues to govern the field, business connection involves the relationship between the business carried on by a non-resident (outside taxable territories), which yields profits or gains, and some activity in the taxable territories which contributes directly or indirectly to the earning of those profits and gains. It predicates an element of continuity, and postulates a real and intimate relation between the trading activity carried on outside the taxable territories and the trading activity within the territories, the relation between the two contributing to the earning of income by the non-resident in his trading activity - the Agents in the present case. The matter is, thus, principally and primarily factual. This is also what the Board Circular 23 (supra) explains, i.e., whether the non-resident has a business connection in India, from which income, profits or gains can be said to arise w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equently, of section 40(a)(i), are inapplicable. We decide accordingly, and the assessee succeeds. 9. The next [(v) and (vi)] grounds of the Revenue's appeal relates to the disallowance of the claim for damaged goods (at ₹ 15,98,677/-). The basis of the disallowance is the assessee's inability to prove the same. The claim was firstly without details as to the consignment or the defects. The goods claimed to be damaged were not returned back, as would normally be the case where the part of the consignment is rejected as so. The e-mails, furnished in support (of the claim), can neither be regarded as authentic nor were verifiable. In fact, the consignment details provided were in respect of the goods exported during a preceding year. In other words, the claim for damaged goods was not backed by reliable evidence, so that it was, rather, considered by the A.O. as a ploy to lower the tax liability. The assessee, however, found favour in appeal on the ground of commercial expediency. 10. Before us, on a question by the Bench as to why the supplies having been made through sale agents, and even otherwise as a matter of business practice, were the defect not pointed out or identif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd who shall decide the same in accordance with the law, be it u/s. 37(1) or u/s. 36(1)(vi), issuing definite findings of fact. We decide accordingly. 12. Gds. (vii) and (viii) are general in nature, warranting no adjudication. 13. In the result, the Revenue's appeal is partly allowed. Assessee's Appeal (in ITA No. 5736/Mum/2014) 14. Vide Gd. 1 of its appeal, the assessee claims depreciation at 80%, i.e., the rate exigible on Windmill, on the following expenditure, being components of its cost, viz. (a) development rights for restoration, paid to the State Government of Andhra Pradesh; (b) Erection and commissioning expenditure; and (c) Transportation expenditure, as against at 15% allowed to it. For each of the expenses, the assessee claims its' case to be covered by a decision by the tribunal, quoting its citation per the relevant ground itself. 15. We have heard the parties, and perused the material on record. We find no reason not to accept the assessee's claim or to take any different view in the matter in the admitted facts of the case, i.e., each of the expenditure forming part of the cost of the windmill, i.e., up to its' commissioning stage, on which, therefore, d ..... X X X X Extracts X X X X X X X X Extracts X X X X
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